Business / Corporate

Japan Tobacco's Canada unit gets court protection after potentially crushing legal defeat in Quebec

Bloomberg

Japan Tobacco Inc.’s Canadian unit was granted creditor protection by the Ontario Superior Court after a legal defeat over the risks of smoking threatens the existence of tobacco companies in the country.

The court extended protection in favor of JTI-Macdonald Corp. after the company argued that the damages award in the case of up to 1.77 billion Canadian dollars ($1.32 billion) exceeded its capacity to pay, Japan Tobacco said in a statement. JTI-Macdonald filed for protection from its creditors on March 8.

The Canadian units of British American Tobacco PLC, Philip Morris International Inc. and Japan Tobacco were ordered earlier this month to pay damages initially estimated at about CA$17 billion after losing an appeal over class actions filed by Quebec smokers. The total industry liability was later estimated at CA$13.5 billion. British American Tobacco said the ruling will hit its profit and set aside CA$758 million to cover damages, while Philip Morris cut its 2019 outlook.

The legal defeat in Quebec was the latest blow to global tobacco companies, which have been undergoing a major shift as they try to lower their reliance on traditional cigarettes. They are seeking a future with alternative products as smoking demand wanes and countries tighten regulations.

Analysts had warned that if Big Tobacco loses the Quebec cases, it could bankrupt the industry in Canada. The case stems from lawsuits originally filed in 1998 and involved the first damages against the industry in Canada. The lawsuits were in favor of smokers seeking damages for addiction and smoking-related diseases, who argued they were never warned of the risks.

JTI-Macdonald said the protection against creditors was its best option allowing it to continue doing business. The company said it will also proceed with an appeal to the Supreme Court of Canada.

While this case poses a risk, the industry faces even bigger headaches in Canada, where the country’s provinces are also suing the tobacco industry to recover health care costs. Ontario alone is claiming damages of CA$50 billion.

The federal government may eventually need to step in to negotiate a settlement, because if legal cigarette manufacturers go under, the country would face the risk of a boom in illicit tobacco, according to Citigroup analyst Adam Spielman.

The decision came a week after the U.S. Supreme Court turned away the tobacco industry’s effort to derail lawsuits by thousands of Florida smokers. In that case, the tobacco companies said they face another 2,300 pending suits.

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